Thursday, June 22, 2006

Mob mentality

Stock article

"Beating an imperfect market

The strategy these greats have all followed is known as value investing. Here's how it works:

  1. Figure out what a company is really worth.
  2. Determine how much the stock market is asking for the business.
  3. Invest based on the difference between No. 1 and No. 2.
  4. Wait for the market to realize and correct its mistake."
The thing is, that strategy is exactly what you do when you day trade. You profit from the market's slow (relative to you) correction mechanism.

"No matter what the academics say, the stock market doesn't predict the future any better than my broken crystal ball does. At its best, the market reflects the aggregate opinion of its participants. Like any other mob, it's often wrong."

What I try and do, is identify when the Mob is changing direction, and they don't know it. From that example, you can see that most stocks don't do the average. Now, try this out for a strategy, buy those listed stocks in the table, BUT! do the Joe thing. Set a limit of like, -2% or something sort of small. Now, when you average the stocks, you get 26.9% returns. Thats double the average without stops.

Also, the other good advice in there, is that you should buy if the company gets knocked around, but is still a strong company. A huge stock fall is often your best friend because of the capability for rebound. This works on all timescales also. My problem with longer time scales is that it allows for more external events to happen. These external events post prediction would mess up your prediction because they weren't taken into account. Short term, I don't have to worry as much about unforseen events, because there just isn't time.

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